After a sustained period of disappointing returns from emerging markets, some pension funds are turning to even less developed, or frontier, markets for growth.

Frontier markets lure pension funds hungry for yield

The move means that small amounts of UK pension fund assets will be invested in countries such as Botswana, Ukraine, Vietnam and Kazakhstan, all of which are in the MSCI Frontier Markets index.

Cornwall Pension Fund, a £1.4 billion local authority fund, has raised its allocation to frontier markets to around 5% of the fund. It is awarding its second global frontier markets mandate – worth £34 million – to Advance Emerging Capital this week after awarding a £60 million mandate to the HSBC Frontier Markets Equity strategy in February.

Matthew Trebilcock, investment manager of the Cornwall Pension Fund, said: “Like all pension funds, we are focused on where we are likely to see investment growth in the future.”

The MSCI Frontier Markets index was up by 23.1% in the three years to March, according to figures from FE Analytics, against a fall in MSCI’s Emerging Markets index of 11%.

Mitesh Sheth, director of strategy at investment consultancy Redington, said: “We have seen a couple of clients enquire about frontier markets, and we have a couple of clients invested. It’s not huge. But with a little bit of wobble in emerging markets recently, clearly there was a bit of risk appetite that came out, and maybe a little bit is going back in now.”

Investor awareness of liquidity risk has improved, according to fund managers, but the level of liquidity varies significantly by country. In Africa, managers cite listed opportunities in Egypt, Nigeria and Kenya, where liquidity is better than in other frontier regions.

T Rowe Price is among those companies responding to the demand, with the forthcoming launch of its new Global Frontier fund, subject to regulatory approval. The new fund will be a broader product than the existing Middle East & Africa fund that the company offers.

Oliver Bell, portfolio manager at T Rowe Price, said: “Asset allocators like pension funds… now want someone to look after the final two or three per cent in frontier markets. We will be meeting that demand in the very near future. You get the impression that everyone is coming to the same conclusion at the same time when writing the cheques.”

East Riding Pension Fund, a £3 billion local authority retirement fund, amended its policies in February to allow investments in frontier markets. The fund added the MSCI Frontier Markets index to its emerging markets allocation, which was increased from a maximum of 3.5% of fund assets, or around £100 million, to 5%, or £150 million.

Ian Sandiford, senior portfolio manager at the East Riding Pension Fund, said: “This isn’t a commitment at this stage, but it does give us the option.”